Last week’s economic reports reinforced the recent bifurcation of the US economy. On the one hand, the industrial sector, battered by slowing global growth and trade war tariffs, remains depressed while the service sector, supported by robust consumer spending, continues to expand. Indeed, the most recent manufacturing PMI report registered its lowest level in a decade yet, during the second quarter, consumer consumption reached 4.3% annualized, its highest level in a number of years. As consumer spending represents two-thirds of US economic activity, second-quarter GDP advanced at a better-than-expected 2.1% annualized rate. Additionally, manufacturing momentum picked up at the end of the quarter, as both durable goods and capital goods orders turned up in June. Whether or not that momentum is sustained remains to be seen, as regional Federal Reserve manufacturing surveys were tepid in July.
Other than Boeing and Caterpillar, the companies that reported second-quarter earnings last week exceeded expectations. Thus, stocks did relatively well and markets ended the week ahead. Both the Russell 2000 and the S&P 500 Index rose, up 2.0% and 1.7%, respectively, however, the Dow Jones Industrial Index, weighed down by Boeing, was flat. On the international front, as economic news was not as sanguine, stocks slipped. Developed markets were off slightly while emerging markets fell -0.8%. With the Federal Reserve on track to cut interest rates 25 basis points on July 31st, bond prices firmed throughout the week. Bonds including corporates, municipals and high yield bonds all rallied last week.